The Stock Market, Explained

Despite an abundance of risk, the stock market continues to climb a wall of worry.  Obviously, with the European debt crisis, China’s economic slowdown, and posturing from Iran, the stock market’s rise defies all logic.  With all the known hazards out there, shouldn’t investors be piling into treasuries?

One of sound mind and good judgment would think so.  But, to the contrary, the opposite is happening; yields on ten year treasury notes topped 2 percent last Friday for the first time in nearly a month.  Similarly, the S&P 500 is up 20 percent since early October.

“Strong start for stocks, but what’s changed,” asks a Reuters headline over the weekend.  “Will equities rally further?” asks Credit Suisse analyst Andrew Garthwaite in the article.

According to Garthwaite, the S&P 500 should rise to 1,400 by the end of the year.  Still, Garthwaite pointed out the risks of a more severe recession in Europe and a slowdown in the United States.

So which is it…will stocks continue to rally or will a financial or economy crisis crash the markets?

Clearly, the answer to both questions is yes.  Thus, caveat emptor warns Reuters…let the buyer beware.

The Wrong Time to Buy Stocks?

Unfortunately, this market ambivalence is frustrating for small investors saving for retirement.  They’ve been burned again and again over the last twelve years.  Contrary to what their broker repeatedly told them, stocks don’t always go up.  In fact, sometimes buy and hold is a terrible way to invest for retirement.

So now that they’ve sat out the S&P 500’s latest 20 percent rally for the safety of treasuries yielding 2 percent, the stock market’s enticing them back.  Will taking on greater risk of stocks be rewarded or punished in the months ahead?

Here at the Economic Prism we don’t know how much longer the uptrend will continue any more than the next guy.  We look at the European debt crisis and prospects of a slowing economy in China and see a dangerous investment world out there.  But that’s not all…

We look at the debt problem in the United States and see an elephant in the room that’s not going away.  Buying stocks at a time like this seems foolish.  Moreover, if the way to make money in the stock market is to buy low and sell high, isn’t buying stocks after a 20 percent rally the wrong time to buy?

The answer, of course, is yes…except for when it is no.  Here we’ll attempt to explain…

The Stock Market, Explained

The market, the old timers say, is a forward looking animal.  That means it should lead the economy both up and down.  To our dismay, the stock market’s risen dramatically over the last three and a half months.  Now, just like the old timers said it would, the economy appears to be following.  By the end of the week we’ll know more…

A slew of corporate earnings will be reported throughout the week, along with a mid-week Fed meeting.  December new home sales data and durable goods orders will be released on Thursday.  Plus, on Friday, fourth-quarter gross domestic product will be released by the Commerce Department.

Yet even if the news reported throughout the week supports a strengthening economy, caution is warranted.  We liken losing money in the stock market to be the same as a root canal…we’d rather not suffer such pain.  Quite frankly, we’d rather miss a 20 percent rise than risk losing 20 percent because we bought in the face of a looming crisis.  We consider it simple mathematics – if you lose 20 percent, you must then make 25 percent just to get back to even.

The point is, stocks go up and then they go down.  So, too, they go down and then they go up.  But sometimes times they go down and then they go down some more.  For what’s absolutely the right time to buy at one time is spectacularly wrong at another.  And what’s spectacularly the wrong time to buy at one time is absolutely right at another.

“The bulls were able to flex their muscles a bit and the bears can’t really point to a whole lot of tangible news that’s really going to change matters much,” said Hayes Miller of Baring Asset Management Inc., following yesterday’s market close.

For stock jobbers, horoscope writers, chiropractors, legislatures, and the alike, Miller’s explanation is perfect in all ways.  It reduces the incredibly complex to the absurdly simple.  For the rest of us, those which use our brains, it offers massive proof that, even in the midst of what appears to be sophisticated society, the stock market is best explained using animals.

Sincerely,

MN Gordon
for Economic Prism

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